Servus #14

March 2023

The topics covered in our current newsletter are: “State pension increase to 01.07.2023″, “Reform of the statutory pension insurance: Concept of the Federal Ministry of Finance on “Generation Capital”, “Case law: BAG decision on settlement calculation for lifelong retirement pensions”, and “Current developments in working time accounts”.

Table of Contents

State pension increase as of 01.07.2023

The German Federal Ministry of Labor and Social Affairs announced at the end of March that state pensions will increase by 4.39 percent in western Germany and by 5.86 percent in the eastern states as of July 1, 2023. The pension adjustment, which takes place in rotation on July 1 of each year, is based on a relevant wage increase of 4.50 percent in the old federal states and 6.78 percent in the new federal states. In 2022, the pension adjustment was already relatively high at 6.12 percent in the new federal states and 5.35 percent in western Germany, but ultimately only reflects current wage trends.

The current pension value (equivalent value corresponding to one earning point) is to be raised from the current 36.02 euros for the old federal states and 35.52 euros for the new federal states to a uniform 37.60 euros. This means that 33 years after reunification, the alignment of pension values in the east and west has been completed. This does not change the fact that the pay-as-you-go system of statutory retirement pensions in Germany is increasingly failing to live up to its socio-political claim to provide basic provision for retirement: As of Dec. 31, 2021, the average net retirement state pensions paid out (standard retirement pensions and early retirement pensions) amounted to 1,218 euros (west) and 1,141 euros (east) per month for men and 809 euros (west) and 1,070 euros (east) per month for women.

Reform of the statutory pension insurance: Concept of the Federal Ministry of Finance on “Generational Capital”

The numerous reform projects and reform proposals on private and statutory pensions have been supplemented by a publication from the German Federal Ministry of Finance (BMF). We recall: As part of a comprehensive pension reform, the coalition parties SPD, FDP and Greens had agreed in the coalition agreement to introduce partial capital funding of the statutory pension insurance. This was intended to stabilize the contribution rates and pension level in the pension insurance system in the long term. As a first step, it was planned to endow a publicly administered fund initially with 10 billion euros. This so-called equity pension was also intended as a response to the fact that the pay-as-you-go system of the statutory pension is facing more and more challenges in an aging society. However, nothing happened for the time being in 2022.

With the concept that has now been published, the BMF would like to enter into the vote on a draft bill for the planned statutory regulation. The proposed “generation capital” is intended to supplement the statutory pension with further yield achieved on the stock markets. The idea is to build up the capital stock from public funds, initially by means of loans from the federal government amounting to EUR 10 billion in 2023. The generational capital is intended to help dampen pension contribution rates in the long term by exploiting increases in the value of investments. A foundation would be set up to manage and monitor the investment decisions. Strict earmarking is intended to rule out any use of the returns for purposes other than pension insurance.

Case Law: BAG decision on settlement calculation for lifelong retirement pensions

According to a recent decision of the BAG, the settlement of current retirement pensions by means of a one-time payment by the employer is not generally invalid, but requires a lump-sum settlement at least in the amount of the actuarially determined present value (BAG decision dated February 27, 2023, ref. 3 AZR 220/22).

The case: The Articles of Association of a group pension fund provided for the possibility of paying a one-time lump-sum settlement in the amount of 10 times the annual pension instead of a current retirement pension. The former employer wanted to make use of this right and settle the monthly retirement pension owed of 1,030.41 euros by paying 10 times the gross annual amount of 123,649.20 euros (approx. 107,000 euros after deduction of wage and church tax).

In doing so, the BAG – like the lower courts – classified the agreements made in the benefit plan of the provident fund as general terms and conditions. According to the regulations applicable to them, an agreement on a right to change or deviate from the promised performance is invalid unless the agreement on the change or deviation is reasonable for the other party to the contract, taking into account the interests of the user (Section 308 No. 4 BGB). According to the consideration required thereunder, a severance payment is not reasonable if the clause provides for a replacement of the pension benefit owed by a lump-sum payment not at least equal in value but by a lower lump-sum payment.

In this way, employees would be deprived of at least part of the remuneration they had already earned retrospectively, i.e. shortly before the occurrence of the pension event – even though they had already paid their consideration in full during the existing employment relationship. In the view of the BAG, an effective severance payment clause therefore requires that the lump-sum settlement at least corresponds to the actuarially calculated present value of the current pension.

However, this should have been a matter of course for the former employer even without a ruling by the BAG. For the EPF (Euro-BetriebsPensionsFonds e.V.) – which carries out the pension scheme for its sponsoring companies – it is in any case.

Current developments in working time accounts

While working time accounts have long since established themselves in many areas as an instrument for planning working time and life, the tax authorities are still opposed to the tax recognition of working time accounts for managing partners (GGF). In its letter of June 17, 2009 (IV C 5 – S 2332/07/0004), the BMF had already announced that agreements on the establishment of working time accounts were not compatible with the job description of persons who work as members of executive bodies for corporations. Accordingly, the crediting of wages due in the future to a time value account already leads to an inflow of wages.

In the past, the Federal Fiscal Court (Bundesfinanzhof, BFH) had only partially followed this opinion, albeit with differentiations that were not always comprehensible, in particular between outside directors and sole shareholders. As a result, the BMF clarified in a letter dated 08.08.2019 (IV C 5 -S 2332/07/0004 :004) that agreements on the establishment of working time accounts for members of executive bodies of a corporation are generally to be recognized for tax purposes if the person in question does not hold any shares in the company.

The Hesse Fiscal Court (Finanzgericht Hessen) has now had to rule on a working time account arrangement in which a company had enabled its employees, including the controlling GGF, to participate in a working time account model (ruling dated September 29, 2021 – 4 K 1476/20). The credit balance could be used to finance an early retirement, but also for a full or partial release from work during the still continuing employment relationship. In deviation from this, the use of the credit balance for the GGF was explicitly restricted to financing early retirement and, in addition, the use of the credit balance was linked to the GGF’s termination of service.

While the tax authorities refused to recognize the model for tax purposes, the Tax Court considers it permissible. By limiting the use of the credit to an early retirement benefit, which is also linked to the termination of service and thus the dismissal as managing director, the fundamental incompatibility of board membership and release from duty would not be relevant. The conditions which could have led to a hidden distribution of profits in the case of the allocation to the working time account were therefore not met.

The decision is not yet final and the appeal is pending before the BFH (I B 87/21). Further developments therefore remain to be seen.

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